US Dollar is the Dominator for Now
AUSTRALIAN DOLLAR FORECAST: BULLISH
- The Australian Dollar is caught up in the US Dollar vacuum
- RBA rate hikes are coming thick and fast, strap in
- When it comes to the economy, it doesn’t get much better than this
The Australian Dollar got tonked going into the end of the week despite the RBA delivering an outsized rate hike of 50 basis points on Tuesday.
Global machinations continue to plague the Aussie with the macro environment playing from the traditional song sheet. Supply shocks have pumped the oil price and other commodities higher, lifting inflation expectations, raising the Fed rate hike path, elevating Treasury yields and boosting the US Dollar – sending AUD/USD lower.
This is a massive boon for the Australian economy. Circa AUD 10 billion is walking in the door every month from international trade and the longer the currency remains undervalued, the higher the domestic standard of living is enjoyed.
In times of crisis and/or uncertainty, markets beguile themselves toward a correlation of 1 or -1 without regard for the nuances within each market. This is the situation for the Aussie that sees its domestic economy in possibly the best shape that it has ever been in and yet the currency is languishing.
The strength of the US Dollar is rational given the rising interest rate environment from the Fed. What seems to have been missed by the market is that the RBA has joined the race in jumbo rate hikes and has its ears pinned back to rein in ultra-loose monetary policy.
The RBA does two things very well. They do nothing when nothing is warranted, and they act decisively when action is needed. Action is needed here, and they are going for it. The free money party is over. Conditions need to be tightened and as a consequence, rates are going way north.
A quick rundown of the fundamental position for AUD:
- Unemployment at 3.9% – multi generational lows
- Trade balance AUD 10.5 billion in April and likely to improve on commodity boom
- GDP at 3.3% year-on-year
- CPI at 5.1%
- Cash rate at 0.85% and rising rapidly
- Private and public debt at manageable levels
The RBA releases a chart pack at the beginning of each month and the ones below are just one page that reveal a startling positive scenario for the Australian economy. For a deeper dive, visit here.
One gets the feeling that we will wake up one day in the not-too distant future when AUD/USD is at parity and we will say, ‘well, that kind of makes sense’.
If that doesn’t eventuate, the RBA may need to go beyond ‘neutrality’ to do the work that exchange rate should be doing.
— Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter